Natural gas drillers who flocked to liquids-rich basins in search of better profits just can’t seem to catch a break.
Seven years ago, as shale output surged and gas futures tumbled more than 60 percent, producers abandoned reservoirs that only yielded gas and moved rigs to wells that also contained ethane, propane and other so-called natural gas liquids, or NGLs. These NGL prices were tied to oil futures, which climbed in 2009 as the economy recovered. It was a strategy that worked well — for a while.
Those days are over. Oil has plunged 56 percent from a year ago, and propane at the Mont Belvieu hub in Texas has tumbled 64 percent. The spread between NGL prices and natural gas shrank 9.2 percent last week to $7.02 a barrel, the lowest in at least two years, squeezing producers’ profits.
The culprit is a repeat offender: shale production. This time, the boom in oil output from reservoirs like the Bakken in North Dakota has created a glut of NGLs, and the market is poised to remain well supplied. To survive, gas producers will have to focus on the lowest-cost wells.
“Drillers are going to have to retreat to where the sweet spots are,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “At these price levels, the rig count isn’t going to move higher.”
Oil dropped to the lowest in more than four months in New York on expectation a global glut that drove prices into a bear market will be prolonged.
Goldman Sachs Group Inc. estimates the global crude oversupply is running at 2 million barrels a day and storage may be filled by the fall, forcing the market to adjust, analysts including Jeffrey Currie said in a report dated Thursday. U.S. crude supplies remain about 100 million barrels above the five-year seasonal average, Energy Information Administration data on Wednesday showed.
Oil moved into a bear market in July on signs the global surplus will persist as the U.S. pumps near the fastest rate in three decades and the largest OPEC members produced record volumes. The Bloomberg Commodity Index, which fell almost 11 percent in July, has resumed its decline.
“Prices are under pressure because we’ve got more and more crude coming out of the ground,” Michael Corcelli, chief investment officer of hedge fund Alexander Alternative Capital LLC in Miami, said by phone. “Questions about storage capacity have already been brought up.”
WTI for September delivery fell 49 cents, or 1.1 percent, to settle at $44.66 a barrel on the New York Mercantile Exchange. It’s the lowest close since March 19. Prices are down 16 percent this year.
Brent for September settlement dropped 7 cents to end the session at $49.52 a barrel on the London-based ICE Futures Europe exchange. It touched $48.88, the lowest since Jan. 30. The European benchmark crude closed at a $4.86 premium to WTI.
“It’s the familiar theme of oversupply and shaky demand,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by phone. “The negative reaction to yesterday’s inventory report set up for another drop today. We clearly have more than ample supply.”
About 170 million barrels of crude and fuel have been added to storage tanks and 50 million to floating storage globally since January, according to the Goldman report. Global oil oversupply has risen from 1.8 million barrels a day in the first half of 2015, Goldman said. The balance between supply and demand may only be restored by 2016, Goldman said.
“While we maintain our near-term WTI target of $45 a barrel, we want to emphasize that the risks remain substantially skewed to the downside, particularly as we enter the shoulder months this autumn,” the Goldman analysts said.
Crude supplies in the U.S. fell 4.4 million barrels to 455.3 million last week, the EIA said. Output expanded by 52,000 barrels a day to 9.47 million a day, the first gain in four weeks. Refinery utilization rose by 1 percentage point to 96.1 percent, the highest level since 2005.
Inventories of distillate fuel, a category that includes diesel and heating oil, rose 709,000 barrels to 144.8 million, the most since February 2012, the EIA report showed.
Ultra low sulfur diesel for September delivery rose 1.14 cents, or 0.7 percent, to settle at $1.5499 a gallon in New York. On Monday it closed at its lowest level since July 2009.
“Diesel isn’t up because of the fundamentals,” Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said by phone. “It’s getting support from the upcoming refinery-maintenance season, the harvest season and anticipation of thermal needs later this year.”
The Bloomberg Commodity Index of 22 raw materials dropped 0.3 percent. Eighteen of the components, which include gold, have declined at least 20 percent from recent closing highs, meeting the common definition of a bear market.
Depends if you are investing or a speculating/trading. The previous week’s oil inventory numbers show U.S. crude oil inventories are at the highest level for this time of year in at least the past 80 years. (Source: U.S. Energy Information Administration 11Feb15 for week ending 6Feb15) Investors reacted Tuesday to Citigroup indicating that $20 oil/barrel may soon be on the way. They must have an awful lot of short positions they need going back the right way: “Oil Could Plunge to $20 & this Might be the end of OPEC”: Citigroup goes on to say, “The recent surge in oil prices is just a “headfake,” and oil as cheap as $20 a barrel may soon be on the way, as it lowered its forecast for crude. Despite global declines in spending that have driven up oil prices in recent weeks, oil production in the U.S. is still rising, wrote Edward Morse, Citigroup’s global head of commodity research. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia. The market is oversupplied, and storage tanks are topping out. A pullback in production isn’t likely until the third quarter, Morse said. In the meantime, West Texas Intermediate Crude, which currently trades at around $52 a barrel, could fall to the $20 range “for a while,” according to the report. The U.S. shale-oil revolution has broken OPEC’s ability to manipulate prices and maximize profits for oil-producing countries.
“It looks exceedingly unlikely for OPEC to return to its old way of doing business,” Morse wrote. “While many analysts have said in past market crises ‘the end of OPEC,’ this time around might well be different,” Morse said. Citi reduced its annual forecast for Brent crude for the second time in 2015. Prices in the $45- $55 range are unsustainable and will trigger “disinvestment from oil” and a fourth-quarter rebound to $75 a barrel, according to the report. Prices this year will likely average $54 a barrel.” (Bloomberg 9Feb2015)
Thursday, Swanzy Quarshie of Sentry Investments was on BNN and gave some of our historical favorites some exposure. Her macro-view of the sector/market is a positive outlook for energy and energy related equities for 2015, however, Sentry remains cautious in the short term. Although much of the issues inherent in the oil markets have been priced into the commodity, they see the possibility of a retest of the oil price lows of January driven by growing crude inventory levels globally (levels are at an 80 year high!). For now, they are firmly in the camp that the current demand/supply imbalance is driven by excess supply and expect the market to move closer to equilibrium towards the end of the year with a slowdown in North American drilling activity. At this time, they do not expect demand to have a negative impact on the imbalance. In this environment, they favour companies with strong balance sheets and good cost structures who can take advantage of this downturn to further strengthen their businesses. They prefer oil weighted producers in the short to midterm given the structural challenges in the North American gas market. In the longer term, they are optimistic that growing export channels and increasing industrial demand for natural gas will help to strengthen the North American gas market. Her Top picks: Bankers Petroleum (BNK-tsx), Raging River Exploration (RRX-t) and Whitecap Resources (WCP-t). Legendary value investor Seth Klarman has built a position in Bellatrix (BXE-tsx): According to reports, legendary value investor Seth Klarman has built a position in Bellatrix. Klarman has purchased 21,839,400 common shares of BXE, representing 11.4% of the company’s shares outstanding. Separately, Orange Capital, LLC at last report held 28,146,263 common shares of BXE, representing 14.7% of the company. This week, Canaccord Genuity Energy Analyst Anthony Petrucci initiated coverage on BXE and highlights the company is currently trading at 7.1x 2015E EV/DACF, which is a discount to its peer group at 10.3x. Likewise, its P/NAV of 0.6x is also discounted to the group average of -1.2
In Petrucci’s view, the discount for Bellatrix is too severe, particularly given the company’s asset base and growth profile. While a 2015E D/CF (trailing) of 4.8x is concerning, Petrucci notes BXE’s ability to spend JV dollars to bridge the gap during the current pricing environment. Forbes refers to Klarman as an “investing demigod.” Here is one of Klarman’s most notable quotes, “In capital markets, price is set by the most panicked seller at the end of a trading day. Value, which is determined by cash flows and assets, is not. In this environment, the chaos is so extreme, the panic selling so urgent, that there is almost no possibility that sellers are acting on superior information. Indeed, in situation after situation, it seems clear that fundamentals do not factor into their decision making at all.” (CG 11Feb2015) due to the length of the report, please call/email us if you would like it in its entirety.
Oil extended losses to trade below $45 a barrel amid speculation that U.S. crude stockpiles will increase, exacerbating a global supply glut that’s driven prices to the lowest in more than 5 1/2 years.
Futures fell as much as 2.6 percent in New York, declining for a third day. Crude inventories probably gained by 1.75 million barrels last week, a Bloomberg News survey shows before government data tomorrow. The United Arab Emirates, a member of the Organization of Petroleum Exporting Countries, will stand by its plan to expand output capacity even with “unstable oil prices,” according to Energy Minister Suhail Al Mazrouei.
Oil slumped almost 50 percent last year, the most since the 2008 financial crisis, as the U.S. pumped at the fastest rate in more than three decades and OPEC resisted calls to cut production. Goldman Sachs Group Inc. said crude needs to drop to $40 a barrel to “re-balance” the market, while Societe Generale SA also reduced its price forecasts.
“There’s adequate supply,” David Lennox, a resource analyst at Fat Prophets in Sydney, said by phone today. “It’s really going to take someone from the supply side to step up and cut, and the only organization capable of doing something substantial is OPEC. I can’t see the U.S. reducing output.”
West Texas Intermediate for February delivery decreased as much as $1.19 to $44.88 a barrel in electronic trading on the New York Mercantile Exchange and was at $44.94 at 2:26 p.m. Singapore time. The contract lost $2.29 to $46.07 yesterday, the lowest close since April 2009. The volume of all futures traded was about 51 percent above the 100-day average.
Brent for February settlement slid as much as $1.31, or 2.8 percent, to $46.12 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude traded at a premium of $1.24 to WTI. The spread was $1.36 yesterday, the narrowest based on closing prices since July 2013.
U.S. crude stockpiles probably rose to 384.1 million barrels in the week ended Jan. 9, according to the median estimate in the Bloomberg survey of six analysts before the Energy Information Administration’s report. Supplies have climbed to almost 8 percent above the five-year average level for this time of year, data from the Energy Department’s statistical arm show.
Production accelerated to 9.14 million barrels a day through Dec. 12, the most in weekly EIA records that started in January 1983. The nation’s oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, or fracking, which has unlocked supplies from shale formations including the Eagle Ford and Permian in Texas and the Bakken in North Dakota.
The U.A.E. will continue plans to boost its production capacity to 3.5 million barrels a day in 2017, Al Mazrouei said in a presentation in Abu Dhabi yesterday. The country currently has a capacity of 3 million and pumped 2.7 million a day last month, according to data compiled by Bloomberg.
OPEC, whose 12 members supply about 40 percent of the world’s oil, agreed to maintain their collective output target at 30 million barrels a day at a Nov. 27 meeting in Vienna. Qatar estimates the global surplus at 2 million a day.
In China, the world’s biggest oil consumer after the U.S., crude imports surged to a new high in December, capping a record for last year. Overseas purchases rose 19.5 percent from the previous month to 30.4 million metric tons, according to preliminary data from the General Administration of Customs in Beijing today. For 2014, imports climbed 9.5 percent to 310 million tons, or about 6.2 million barrels a day.
Oil Companies and Investors In Denial : Portfolio Profits At Risk
My rant – the curse of Cassandra :
Cassandra, daughter of the king and queen, in the temple of Apollo, exhausted from practising, is said to have fallen asleep – when Apollo wished to embrace her, she did not afford the opportunity of her body. On account of which thing :
when she prophesied true things, she was not believed.
Shipping Sector / Bulk ShippersYou can review our stock market letter athttp://www.amp2012.com to follow our profits in the shipping sector before our retreat as overcapacity has yet to effect continued overbuiding. In 2008-9 rates- illustrated by the Baltic Dry Index – were at their peak. The BDI hit over 10,000. Today it is roughly 10 % of that benchmark and the sector slide continues. We have an impressive watchlist of former ” darlings” – but we are content to watch and wait.
Oil/ Energy I am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL, which dropped another 8% following Wednesday’s 23% plunge…
Have you avoided these sectors ?– you ( your portfolio) would have been better off today
and now you have to decide for 2015.
No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.
Jack A. Bass Managed Accounts
Fees : 1 % annual set up and a performance bonus of 20 % – only if we perform.
You can withdraw your funds at the rate of 1 % monthly if you require an income stream
To learn more about portfolio management , tax reduction,asset protection, trusts ,offshore company formation and structure for your business interests (at no cost or obligation)
Telephone Jack direct at 604-858-3202
10:00 – 4:00 Monday to Friday Pacific Time ( same time zone as Los Angeles).
Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.
The oil industry was listening as OPEC talked down crude prices to a more than five-year low.
Drillers, refiners and other merchantsincreased bets on lower prices to the most in three years in the week ended Jan. 6, government data show. Producers idled the most rigs since 1991, with some paying to break leases on drilling equipment.
Companies are hedging more and drilling less amid concern that the biggest slump in prices since 2008 will continue. Oil dropped for a seventh week after officials from Saudi Arabia, the United Arab Emirates andKuwait reiterated they won’t curb output to halt the decline.
“Producers are desperately hedging their production in a drastically falling market,” Phil Flynn, a senior market analyst at the Price Futures Group in Chicago, said by phone Jan. 9. “They’re trying to lock in prices because they are convinced that the market will stay down for a while.”
WTI slid $6.19, or 11 percent, to $47.93 a barrel on the New York Mercantile Exchange on Jan. 6, settling below $50 for the first time since April 2009. Futures for February delivery declined $1.53 to $46.83 in electronic trading at 8:09 a.m. local time.
The Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world’s oil, has stressed a dozen times in the past six weeks that it won’t curb output to halt the rout. The U.A.E. won’t cut production no matter how low prices fall, Yousef Al Otaiba, its ambassador to the U.S., said at a Bloomberg Government lunch in Washington on Jan. 8.
The group decided to maintain its collective quota at 30 million barrels a day at a Nov. 27 meeting in Vienna. Output averaged 30.24 million barrels a day in December, according to a Bloomberg survey.
U.S. crude production was 9.13 million barrels a day in the seven days ended Jan. 2 after reaching 9.14 million three weeks earlier, the highest in weekly Energy Information Administration data since 1983. Stockpiles were 382.4 million barrels as of Jan. 2, a seasonal high.
The nation’s oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, which have unlocked supplies from shale formations including the Eagle Ford and Permian in Texasand the Bakken in North Dakota. Global oil prices below $40 begin to make wells in such places unprofitable to operate, Wood Mackenzie, an Edinburgh-based consultant, said in a report Jan. 9.
Rigs seeking oil decreased by 61 to 1,421, Baker Hughes Inc. said Jan. 9, extending the five-week decline to 154. It was the largest drop since February 1991, which also followed a slide in prices before the start of the Persian Gulf War.
Helmerich & Payne Inc., the biggest rig operator in the U.S., and Pioneer Energy Services Corp. said last week that they had received early termination notices for rig contracts.
Producers and merchants boosted their net short position by 21 percent, or 17,577 futures and options, to 100,997 in the week ended Jan. 6, according to the Commodity Futures Trading Commission, the most since Jan. 10, 2012.
Hedge funds and other large speculators raised bullish bets by 7 to 199,395 contracts.
“You have this tension and lack of consensus among money managers of what to do with a price under $50,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone Jan. 9. “People tend to think of money managers as a black box where they all use same strategy and march in lockstep, but this highlights that it’s not really the case.”
Bullish bets on Brent crude rose to the highest level in more than five months, according to ICE Futures Europe exchange.
Net-long positions gained by 24,598 contracts, or 21 percent, to 140,169 lots in the week to Jan. 6, the data show. That’s the highest since July 15.
In other markets, bearish wagers on U.S. ultra-low sulfur diesel decreased 12 percent to 23,789 contracts as the fuel sank 7.6 percent to $1.7262 a gallon.
Net short wagers on U.S. natural gas fell 15 percent to 10,323 contracts. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Nymex natural gas dropped 5 percent to $2.938 per million British thermal units.
Bullish bets on gasoline declined 0.4 percent to 44,050. Futures slumped 6.8 percent to $1.3543 a gallon on Nymex in the reporting period.
Regular gasoline slid 1.3 cents to an average of $2.139 on Jan. 10, the lowest since May 5, 2009, according to Heathrow, Florida-based AAA, the country’s largest motoring group.
The global crude oversupply is 2 million barrels a day, or 6.7 percent of OPEC output, Qatar estimates. Only 1.6 percent of supply would be unprofitable with prices at $40 a barrel, according to Wood Mackenzie.
“If you’re a producer and your cost is below the price in the market, if you hedge it even at depressed prices you can still make money,” Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said by phone Jan. 9. “Somebody’s locking in profits even at these low prices.”
Goldman Sees Need for $40 Oil as OPEC Cut Forecast Abandoned
Goldman Sachs said U.S. oil prices need to trade near $40 a barrel in the first half of this year to curb shale investments as it gave up on OPEC cutting output to balance the market.
The bank reduced its forecasts for global benchmark crude prices, predicting inventories will increase over the first half of this year, according to an e-mailed report. Excess storage and tanker capacity suggests the market can run a surplus far longer than it has in the past, said Goldman analysts including Jeffrey Currie in New York.
The U.S. is pumping oil at the fastest pace in more than three decades, helped by a shale boom that’s unlocked supplies from formations including the Eagle Ford in Texas and the Bakken in North Dakota. Prices slumped almost 50 percent last year as the Organization of Petroleum Exporting Countries resisted output cuts even amid a global surplus that Qatar estimates at 2 million barrels a day.
“To keep all capital sidelined and curtail investment in shale until the market has re-balanced, we believe prices need to stay lower for longer,” Goldman said in the report. “The search for a new equilibrium in oil markets continues.”
West Texas Intermediate, the U.S. marker crude, will trade at $41 a barrel and global benchmark Brent at $42 in three months, the bank said. It had previously forecast WTI at $70 and Brent at $80 for the first quarter.
Goldman reduced its six and 12-month WTI predictions to $39 a barrel and $65, from $75 and $80, respectively, while its estimate for Brent for the period were cut to $43 and $70, from $85 and $90, according to the report.
“We forecast that the one-year-ahead WTI swap needs to remain below this $65 a barrel marginal cost, near $55 a barrel for the next year to sideline capital and keep investment low enough to create a physical re-balancing of the market,” the bank said.
Goldman estimates there’s sufficient capacity to store a surplus of 1 million barrels a day of crude for almost a year. It expects the spread between WTI and Brent to widen in the next quarter as discounted U.S. crude prices and “strong margins lead U.S. refineries to export the glut to the other side of the Atlantic.”
The Brent-WTI spread will average $5 a barrel in 2016, according to the bank. The gap was at $1.50 today.
Investors are in denial but bankers see the problem:
Lenders are already doling out tough love to companies, with some lenders wanting to see producer plans for handling further price drops while others are urging asset sales.
The 10 highest ratios of net debt/EBITDA from the last 12 months, according to S&P Capital IQ, belong to KWK, AR, WRES, GDP, REN, HK,XCO, REXX, MPO, EPE.
WTI Oil Pares Gain After Report Shows Fuel Supply Gains
West Texas Intermediate oil pared gains after a government report showed that U.S. fuel stockpiles surged. Brent earlier slipped below $50 a barrel for the first time since May 2009.
Inventories of distillate fuel, a category that includes heating oil and diesel, increased by a record 11.2 million barrels last week, the Energy Information Administration said. Gasoline stockpiles advanced 8.12 million barrels while crude supplies decreased 3.06 million.
“This report is bearish overall because of the huge builds in distillate and gasoline supplies,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “You can ignore the crude number because there’s already so much in storage. This decline was just a drop in the bucket.”
The plummeting price of oil means no more trout ice cream.
Coromoto, a parlor in Merida, Venezuela, famous for its 900 flavors,closed during its busiest season in November because of a milk shortage caused by the country’s 64 percent inflation rate, the world’s fastest.
That’s the plight of an oil-producing nation. At the same time, consuming countries like the U.S. are taking advantage. Trucks, which burn more gasoline, outsold cars in December by the most since 2005, according to data from Ward’s Automotive Group.
The biggest collapse in energy prices since the 2008 global recession is shifting wealth and power from autocratic petro-states to industrialized consumers, which could make the world safer, according to a Berenberg Bank AG report. Surging U.S. shale supply, weakening Asian and European demand and a stronger dollar are pushing oil past threshold after threshold to a five-and-half-year low, with a dip below $40 a barrel “not out of the question,” said Rob Haworth, a Seattle-based senior investment strategist at U.S. Bank Wealth Management, which oversees about $120 billion.
“Oil prices are the big story for 2015,” said Kenneth Rogoff, a Harvard University economics professor. “They are a once-in-a-generation shock and will have huge reverberations.”
Brent crude, the international benchmark, fell as low as $49.66 a barrel today, dropping below $50 for first time since 2009. Prices dropped 48 percent in 2014 after three years of the highest average prices in history. West Texas Intermediate, the U.S. benchmark, plunged to as low as $46.83 today, about a 56 percent decline from its June high.
“We see prices remaining weak for the whole of the first half” of 2015, said Gareth Lewis-Davies, an analyst at BNP Paribas in London.
If the price falls past $39 a barrel, we could see it go as low as $30 a barrel, said Walter Zimmerman, chief technical strategist for United-ICAP in Jersey City, New Jersey, who projected the 2014 drop.
“Where prices bottom will be based on an emotional decision,” Zimmerman said. “It won’t be based on the supply-demand fundamentals, so it’s guaranteed to be overdone to the downside.”
The biggest winner would be the Philippines, whose economic growth would accelerate to 7.6 percent on average over the next two years if oil fell to $40, while Russia would contract 2.5 percent over the same period, according to an Oxford Economics Ltd.’s December analysis of 45 national economies.
Among advanced economies, Hong Kong is the biggest winner, while Saudi Arabia, Russia and the United Arab Emirates fare the worst, according to Oxford Economics.
One concern of central bankers is the effect of falling oil prices on inflation. If crude remains below $60 per barrel this quarter, global inflation will reach levels not seen since the worldwide recession ended in 2009, according to JP Morgan Securities LLC economists led by Bruce Kasman in New York.
Kasman and his team are already predicting global inflation to reach 1.5 percent in the first half of this year, while sustained weakness in oil suggest a decline to 1 percent, they said.
The euro area would probably witness negative inflation, while rates in the U.S., U.K. and Japan also would weaken to about 0.5 percent. For what it calls price stability, the Federal Reserve’s inflationtarget is 2 percent. Emerging-market inflation would also fade although lower currencies and policies aimed at slowing the effects on retail prices may limit the fall.
As for growth, a long-lasting price of $60 would add 0.5 percentage point to global gross domestic product, they estimate.
Even as cheaper fuel stimulates the global economy, it could aggravate political tension by squeezing government revenue and social benefits, Citigroup Inc. analysts said in a Jan. 5 report.
Either way, previously unthinkable events now look more likely. Byron Wien, a Blackstone Group LP vice chairman, predicting that Russian President Vladimir Putin will resign in 2015 and Iran will agree to stop its nuclear program.
Iran is already missing tens of billions of dollars in oil revenue due to Western sanctions and years of economic mismanagement under former President Mahmoud Ahmadinejad.
President Hassan Rouhani, elected on a pledge of prosperity to be achieved by ending Iran’s global isolation, is facing a falling stock market and weakening currency. Iranian officials are warning of spending and investment cuts in next year’s budget, which will be based on $72-a-barrel crude. Even that forecast is proving too optimistic.
“Iran will stumble along with less growth and development,” said Djavad Salehi-Isfahani, a professor of economics at Virginia Tech in Blacksburg, Virginia, who specializes in Iran’s economy. “The oil price fall is not reason enough for Iran to compromise.”
The Russian economy may shrink 4.7 percent this year if oil averages $60 a barrel under a “stress scenario,” the central bank said in December. The plunge in crude prices prompted a selloff in the ruble with the Russian currency falling to a record low against the dollar last month and tumbling 46 percent last year, its worst performance since 1998, when Russia defaulted on local debt.
“The risk is that, as a badly-wounded and cornered bear, Russia may turn more aggressive in its increasing desperation, threatening global peace and the European economic outlook,” said Holger Schmieding, Berenberg Bank’s London-based chief economist. However, “the massive blow to Russia’s economic capabilities should –- over time –- make it less likely that Russia will wage another war.”
Russian oil production rose to a post-Soviet record last month, showing how pumping of the nation’s biggest source of revenue has so far been unaffected by U.S. and European sanctions or a price collapse. The nation increased output to 10.667 million barrels a day, according to preliminary data from the Energy Ministry on Jan. 2. That compares with global consumption of 93.3 million barrels a day, based on the International Energy Agency’s estimate for 2015.
Venezuela, which relies on oil for 95 percent of its export revenue, risks insolvency, Jefferies LLC said in a Jan. 6 note. The cost of insuring the country’s five-year debt has tripled since July, Citigroup said. President Nicolas Maduro is visiting China to discuss financing and expects to travel to other OPEC nations to work out a pricing strategy.
The U.S., still a net oil importer, would accelerate economic growth to 3.8 percent in the next two years with oil at $40 a barrel, compared with 3 percent at $84, the Oxford Economics study found. The boost to consumers could be offset by oil companies’ scaling back investments, according to Kate Moore, chief investment strategist at JPMorgan Private Bank. Producers are cutting spending by 20 percent to 40 percent, according to Fadel Gheit, an analyst at Oppenheimer & Co.
The mixed picture is confounding investors. The Standard & Poor’s 500 Index of U.S. equities fell 1.9 percent on Jan. 5, the biggest decline since October, as oil brought down energy shares and stoked concerns that global growth is slowing.
While cheaper oil helps consumers, business spending has a bigger effect on equities, and oil companies are set to cut investments. Oil at $50 a barrel could trim $6 a share off earnings in theS&P 500 Index this year, according to Savita Subramanian and Dan Suzuki, New York-based strategists at Bank of America Corp.
Bets on high energy prices have mashed share prices of companies such as Ford Motor Co., Tesla Motors Inc. and Boeing Co.
Caterpillar Inc., Joy Global Inc., Allegheny Technologies Inc., Dover Corp., Jacobs Engineering Group and Quanta Services Inc. are all down more than 20 percent since oil peaked at almost $108.
Despite those losses, Morgan Stanley last month concluded cheaper fuel is a net benefit for the U.S. economy.
“Any massive redistribution of income can raise political tensions,” Schmieding of Berenberg Bank said in the Jan. 6 report. “But, net/net, strengthening the U.S., Europe, Japan, China and India, while weakening Russia, Iran, Saudi Arabia and Venezuela, is likely to make the world a safer place in the end.”
Oil Falls to 5 1/2-Year Low as Russia, Iraq Boost Output
Oil dropped to the lowest since May 2009 amid growing supply from Russia and Iraq and signs of manufacturing weakness in Europe and China.
Futures headed for a sixth weekly loss in New York and London. Oil output in Russia and Iraq surged to the highest level in decades in December, according to data from both countries’ governments. Euro-area factory output expanded less than initially estimated in December. A manufacturing gauge in China, the world’s second-largest oil consumer, fell to the weakest level in 18 months, government data showed yesterday.
Prices slumped 46 percent in New York in 2014, the steepest drop in six years and second-worst since trading began in 1983, as U.S. producers and the Organization of Petroleum Exporting Countries ceded no ground in their battle for market share. OPEC pumped above its quota for a seventh month in December even as U.S. output expanded to the highest in more than three decades, according to data compiled by Bloomberg.
“We’re seeing more of the same,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “The Chinese and European PMI figures signal weaker demand, while there’s ever-increasing supply. Nobody is cutting back on output and now the Russians are posting post-Soviet production highs.”
Brent for February settlement fell 53 cents, or 0.9 percent, to $56.80 a barrel on the London-based ICE Futures Europe exchange at 11:31 a.m. It declined to $55.48, the lowest since May 7, 2009. Volume for all futures traded was 30 percent below the 100-day average. The European benchmark slumped 48 percent last year, the second-biggest annual loss on record behind a 51 percent tumble in the 2008 financial crisis. Brent traded at of $3.24 premium to WTI.
West Texas Intermediate for February delivery rose 32 cents, or 0.6 percent, to $53.59 a barrel on the New York Mercantile Exchange after dropping to $52.03, the least since May 1, 2009. Volume for all futures traded was 34 percent below the 100-day average. Prices are down 3.2 percent this week.
The surge in oil supplies in Iraq and Russia signaled no respite in early 2015 from the glut that’s pushed crude prices lower. The two countries provided 15 percent of world oil supply in November, according to the International Energy Agency.
Russian oil output rose 0.3 percent in December to a post-Soviet record of 10.667 million barrels a day, according to preliminary data e-mailed today by CDU-TEK, part of the Energy Ministry. Iraq exported 2.94 million barrels a day in December, the most since the 1980s, Oil Ministry spokesmanAsim Jihad said.
The final two burning crude-storage tanks were extinguished at Es Sider, Libya’s biggest oil port, National Oil Corp. spokesman Mohammed Elharari said by phone from Tripoli. The fires started Dec. 25, when Islamist militants shot rockets at the port in a second attempt to capture it.
OPEC’s production slid by 122,000 barrels a day from November to 30.24 million last month, led by losses in Saudi Arabia, Libya and the United Arab Emirates, a Bloomberg survey of companies, producers and analysts shows. The 12-member group has a collective target of 30 million a day.
U.S. oil production averaged 9.12 million barrels a day in the week ended Dec. 26, according to the Energy Information Administration. Output increased to 9.14 million a day through Dec. 12, the most in weekly data that started in January 1983.
Inventories of gasoline surged in the week ended Dec. 26 as production climbed to a record, EIA data showed.
Gasoline futures declined 3.14 cents, or 2.1 percent, to $1.4407 a gallon in New York. Diesel decreased 3.18 cents, or 1.7 percent, to $1.8018.
Regular gasoline at U.S. pumps fell to the lowest level since May 2010. The average retail price slipped 0.9 cent to $2.231 a gallon yesterday, according to Heathrow, Florida-based AAA, the nation’s biggest motoring group.
Sector will respond to the lower commodity price but their share price will decline – example;
NEW YORK (MarketWatch) — Linn Energy LLC LINE, +15.20% said Friday it has approved a 2015 budget that cuts oil and natural gas capital spending to $730 million from about $1.55 billion in 2014, the latest company to respond to the recent slide in crude oil prices. “After careful consideration, LINN’s senior management proposed and the Board of Directors approved a 2015 budget that contemplates a significantly lower current crude oil price than in 2014,” Chief Executive Mark Ellis said in a statement. The budget assumes an unhedged NYMEX price of $60 a barrel. The company is cutting its annual dividend to $1.25 a share from $2.90, he said. Linn Energy has signed a non-binding letter of intent with GSO Capital Partners LP, the credit arm of The Blackstone Group LP BX, +0.56% to fund oil and gas development. GSO has agreed to commit up to $500 million to fund drilling programs. Shares were down 6.2% in premarket trade.
Blackstone’s $70 billion credit arm, GSO Capital Partners, committed as much as $500 million to fund oil and natural gas development for Linn Energy LLC (LINE), according to a statement today. The Houston-based energy producer rose as much as 18 percent after the announcement, after losing almost 70 percent of its value in six months as crude prices plummeted.
Private equity firms, while taking steps to shore up energy companies in their portfolios, are hunting for investments in oil and gas producers after Brent tumbled more than 50 percent since June. Energy presents the best opportunity for Blackstone in many years, especially for the New York-based firm’s credit unit, Schwarzman said at a Dec. 11 conference.
“There are a lot of people who borrowed a lot of money based on higher price levels, and they’re going to need more capital,” he said at the conference in New York. “There are going to be restructurings to do. There’s going to be a fallout. It’s going to be one of the best opportunities we’ve had in many, many years.”
Under the five-year agreement with Linn, Blackstone would fund drilling programs at locations selected by Linn for an 85 percent working interest in the wells, according to the statement. If the projects produce a 15 percent annualized return for Blackstone, its stake will drop to 5 percent.
The plunge in oil may usher in a new era for investing in distressed debt, according to Howard Marks, the billionaire co-founder of Oaktree Capital Group LLC. In a letter to clients last month, Marks said his Los Angeles-based firm is becoming more aggressive as companies that borrowed heavily in the low-interest rate environment now come under pressure.
“We knew great buying opportunities wouldn’t arrive until a negative ‘igniter’ caused the tide to go out, exposing the debt’s weaknesses,” Marks wrote. “The current oil crisis is an example of something with the potential to grow into that role.”
Linn, a master-limited partnership, is the latest producer to cut spending on expectations of lower oil and gas prices. The company said today it expects oil to average $60 a barrel in 2015, although it has hedged about 70 percent of its expected output at higher prices. Brent fell 1.9 percent to $56.23 a barrel at 2:38 p.m. in New York.
The agreement with Blackstone, which is non-binding, is “designed to allow Linn to be an active developer of assets with growth capital,” Mark Ellis, Linn’s chief executive officer, said in the statement. “This agreement creates a dynamic alliance.”
The company’s shares rose 13 percent to $11.44 at 2:47 p.m. in New York.
Please see our recent articles published this week on 2015 Energy Sector Forecasts ( archived)